Reviews of President Biden’s twenty months in office have become noticeably more upbeat in the wake of congressional approval of several consequential bills. Less noticed is the improbable role Trump administration officials and pharmaceutical companies played in facilitating this agenda. They unwittingly created a large and illusory funding pool that Congress tapped to ease the passage of three separate measures.
Over the summer, the president signed into law the most significant new gun acquisition restrictions in several decades, which passed with bipartisan support, and the Inflation Reduction Act, with provisions subsidizing health insurance and restricting drug prices. In 2021, Congress also approved a bipartisan infrastructure spending bill.
In each of these cases, the bills were credited by the Congressional Budget Office (CBO) with cutting federal health costs by tens of billions of dollars. The savings, totaling $194 billion, was instrumental to hitting the budgetary objectives required for each to pass.
How this “savings” came about is instructive.
Donald Trump’s surprising ascent to the presidency scrambled political calculations, including for the drug industry. The major companies had long feared unified Democratic control of Congress and the White House because most elected Democrats favor strong government regulation of drug pricing. In contrast, prior to the Trump era, most Republicans opposed government-imposed pricing restrictions.
Trump, however, was unpredictable and not a typical Republican. He ran in 2016 as a populist willing to take on powerful corporate interests, including drug companies. He promised to upend current drug purchasing practices by supporting a stronger government role and allowing consumers to buy lower-priced products directly from Canadian pharmacies.
While Trump himself seemed ready to be maximally disruptive, most of the officials he appointed to key positions were not. They opposed giving the government more power to set prices directly. To satisfy Trump, they scrambled to write an agenda that was both populist in tone and consistent with opposition to government price controls.
In 2018, the first iteration of that agenda was released by the Department of Health and Human Services (HHS) in the form of a white paper. There were many proposals in that document, but a focus was on the rebating system used by large pharmacy benefit managers (PBMs) to reduce the net costs of prescription drugs for insurers and employers. PBMs secure rebate payments from the manufacturers in return for favorable placement on insurance plan formularies. The rebates reduce the total costs of acquiring the products but do not directly lower list prices, or the cost-sharing payments required of patients, which are often tied to list prices.
HHS took the next step in 2019 by announcing a regulatory plan that would have restricted the use of rebates as a PBM purchasing strategy by making them questionable legally under an anti-kickback statute.
Directing the administration’s populist fire toward PBMs was useful for Trump officials because it gave them a profitable industry to target without embracing government-administered price controls. It also dovetailed with the strategy of the pharmaceutical companies who wanted to fend off price limits by shifting the blame for high prices to the rebating practices of PBMs.
Their only problem was that the PBM rule did not add up budgetarily. While the drug companies complained that the use of rebates increased list prices, they never made a compelling case that net prices — the prices paid by purchasers after all discounts have been taken into account — would be lower if rebates were prohibited.
Indeed, it was the view of the analysts in the Office of the Actuary at the Centers for Medicare and Medicaid Services (CMS), and also those at CBO, that eliminating the practice of rebate payments to PBMs would increase net costs for Medicare and Medicaid, not reduce them. The CMS actuaries estimated a rule prohibiting rebates would increase federal costs by $196 billion over ten years. CBO produced a similar estimate, with a budgetary cost of $177 billion from implementation the rule.For a while, it appeared that these official cost estimates would dissuade the administration from moving forward with the PBM rule. In July 2019, the media reported that, after a White House meeting, opponents had convinced the president to kill it.
That was not end of the story, however. After Trump lost re-election in November 2020, HHS went ahead and finalized the long-stalled regulation, with implementation planned for January 2021. One factor in this turnabout may been the departure of key officials who had been instrumental in stopping the regulation in 2019.
Publication of the final rule was a budgetary gift for the Biden administration and Democratic leaders in Congress. The incoming administration was never likely to adopt the view that the main cause of high drug prices is the PBM industry and not the drug companies. Moreover, the PBM industry was suing to stop the rule’s enforcement and may have a good case. To comply with a court order, HHS willingly postponed implementation until January 2023, which also gave key incoming officials more time to assess their options.
Even though the prospects for implementing the rule have been highly uncertain since the Biden administration took over, current budget rules presume eventual implementation absent a clear signal from the executive branch of an intention to withdraw it. Consequently, the higher spending that CMS and CBO assume the rule would cause was, at the beginning of 2021, now implicit in the future spending increases projected for Medicare and Medicaid.
For Congress, higher spending from a rule no one much cares for is an ideal situation because, in such cases, a legislative provision prohibiting implementation is assessed by CBO as reducing federal spending withtout creating a political firestorm.
The bipartisan negotiators of the infrastructure bill from last year recognized immediately the high value of this non-controversial “offset.” They included a provision prohibiting the PBM rule’s implementation before 2026, and were credited by CBO with $50.8 billion in federal savings. The Bipartisan Safer Communities Act delayed it by an additional year, which CBO estimated would save an additional $20.9 billion. And then the Inflation Reduction Act (IRA) pushed out the earliest implementation of the rule to at least 2032, for additional savings of $122.2 billion.
The role the PBM rule played in passage of the IRA is especially ironic. The moratorium on implementing the regulation until 2032 is among largest sources of funding in the bill and crucial to hitting the deficit reduction target required to secure the support of Senator Joe Manchin. Further, the moratorium allowed the Medicare-focused drug pricing restrictions that were included in the IRA to become law, which is what the drug industry was hoping to avoid by directing its political fire at PBMs.
This entire episode is more evidence of a budget process lacking in rigor. A rule that was going to be set aside anyway was kept alive so that Congress could claim the savings from stopping it.
Passage of the IRA does not end the story, either. As matters now stand, Congress can repeat this maneuver again because the IRA’s moratorium ends in 2032. In future years, when there is another scramble for an offset to pave the way for more spending, a further delay of the rule, to 2033 or beyond, might be just what is needed to allow Congress to claim the new spending it wants to approve will not impose higher costs on future taxpayers.
James C. Capretta is a Contributor at RealClearPolicy and a senior fellow at the American Enterprise Institute.